And the best equity fund is …

Question: What is the best-performing equity fund to date? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS and Facebook.

Answer: There are many ways to rank equity funds. So, to keep things simple, let us focus on those funds: 1) that can be bought and sold by the general public (i.e. excludes institutional retirement, proprietary and other similar funds); 2) with readily available historical price data (i.e. excludes variable unit-linked insurance policies); and 3) are invested in equities in the Philippines. And to put both the funds and the benchmark on level playing ground, let us include the use of the Philippine Stock Exchange index (PSEi) Total Return Index (TRI) as one of the benchmarks as the index incorporates the reinvestment of dividends.

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Please note that we only have the recomputed PSEi TRI up to 2007, we can only do performance measurement from that year. In this regard, let us do comparison periods for 12, 10 and 5 years ending in 2019.

We will include risk-adjusted returns as part of the analysis. And because risk-adjusted returns require the use of a risk-free rate, we will use the annual compounded yields of the country’s one-year Treasury bill over the corresponding periods under review.

The resulting data are found on the Personal Finance Advisers Philippines Corp.’s My PF App 2020. But we can only go far as identifying the type of funds and not their actual names. Finally, the returns are all net of management fees but not of entry and exit fees, and pertinent taxes.

There were 40 equity funds measured for the 5-year period. Sixteen of them produced negative compounded annual returns ranging from -0.02 percent to -4.52 percent. The positive returns ranged from 0.04 percent to 3.15 percent. On the other hand, the PSEi and PSEi TRI produced returns of 1.57 percent and 3.29 percent, respectively. The best performing fund was an equity index mutual fund. The same equity index mutual fund dominated risk-adjusted return performance in terms of Sharpe ratio, Treynor ratio and Jensen’s Alpha. And the tracking error of that equity index mutual fund was 3.06 and 3.31 percentage points versus the PSEi and PSEi TRI, respectively. These tracking errors were the highest among index funds measured for the period.

There were 21 equity funds measured for the 10-year period. The compounded annual returns were all positive and ranged from 3.90 percent to 11.48 percent. On the other hand, the PSEi and PSEi TRI produced returns of 9.86 percent and 11.40 percent, respectively. The best performing fund was an equity index unit investment trust fund (UITF). However, the equity index mutual fund that dominated risk-adjusted return performance for the 5-year period also dominated the 10-year period. For the 10-year period, the annual compounded return of that equity index mutual fund was 10.95 percent while its tracking error was 2.17 and 2.89 percentage points versus the PSEi and PSEi TRI, respectively. These tracking errors were the highest among the two index funds measured for the period.

Finally, there were 18 equity funds measured for the 12-year period. The compounded annual returns were all positive and ranged from 1.82 percent to 10.24 percent. On the other hand, the PSEi and PSEi TRI produced returns of 6.62 percent and 9.42 percent, respectively. The best performing fund was an equity UITF. The same equity UITF dominated risk-adjusted return performance for the 12-year period.

But here’s the thing, you should not run after the best performing fund. Why? Your job is to focus on achieving your financial goal by saving and investing the most you can so that you minimize the need for higher returns and in the process minimize the need for taking risks on your hard-earned money. That is just smart financial planning.

Get a financial plan for as low as P100 at the PFA Financial Planning Fair on Jan. 11, 2020. Inquire at 0917-5050709. To learn more about personal financial planning, attend the 81st RFP Program this January 2020. To inquire, email [email protected] or text at 0917-9689774.

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